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SouthEast Asian Miracle Beginning of Crisis The role of financial panic as an essential element of the Asian crisis. Impact of Crisis Role of IMF Learnings Conclusion

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South Korea

Philippines Thailand Hong Kong Singapore Malaysia Taiwan

noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s.   . Singapore. These regions were the first newly industrialized countries. South Korea and Taiwan (Republic of China). All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage .FOUR ASIAN TIGERS  The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong.

They sustained rate of double-digit growth for decades. especially the Tiger Cub Economies. Role models for many developing countries.FOUR ASIAN TIGERS  Their economic success stories became known as the Miracle on the Han River and the Taiwan Miracle .    . Each nation was non-democratic and relatively authoritarian political systems.

macroeconomic discipline. .S.outward orientation. and other good public policies.    High interest rates attractive to foreign investors looking for high rate of return.EAST ASIA MIRACLE  Factors causing East Asia's relative success . high saving and investment rates. Asian Tigers had high tariffs on imports and undervalued currencies. Focused on exports to become rich industrialized nations.

It is a testament to the shortcomings of the international capital markets.S.   .EAST ASIAN CRISIS  Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their nominal value. Their vulnerability to sudden reversals of market confidence.

period of financial crisis that gripped much of Asia beginning in July 1997 Raised fears of a worldwide economic meltdown due to financial contagion. operations and replenishment of funds of the IMF. The financial crisis involves four basic problems or issues: A shortage of foreign exchange that caused the value of currencies and equities to fall . . Inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies. 4. Effects of the crisis on both the United States and world The role. 3. The Southeast Asian Financial Crisis. 2.THE ECONOMIC CRISIS    1.

devalued stock markets and other asset prices. and a precipitous rise in private debt.     Southeast Asia and Japan saw slumping currencies.CONTINUED  Thailand had acquired a burden of foreign debt. Firms overstretched themselves and a combination of factors caused a depreciation. . private firms and corporations looked to finance speculative investment projects. High rates of economic growth and a booming economy.. The debt crisis in East Asia stemmed from inappropriate borrowing by the private sector.

. Indonesia and South Korea had large private current account deficit It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.BEFORE CRISIS        Received large inflow of money High growth rate (8-12%GDP) Dramatic run up in asset prices Increase capital investment High per Capita Income Thailand.

68% for South Korea. 50% for the Philippines. End of 1996. and 84% for Taiwan.     .BEGINNING OF CRISIS  The rapid reversal of private capital inflows into Asia. Large increase in cross border bank loans. 65% for Thailand. the proportion of loans with maturity of one year or less was: 62% for Indonesia.1 billion. Net private inflows dropped from $93 billion to -$12.

PER CAPITA GDP Source : The onset of East Asia Crisis .

The BOT committed almost all of its liquid foreign exchange reserves in forward contracts. Bankruptcies . Bank of Thailand lent over Bt 200 billion ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF).Thailand Hanbo Steel.several merchant banks under significant pressure.TRIGGERING EVENTS      1997. Usable reserve levels of Central Bank fell sharply . Sammi Steel and Kia Motors collapsed.

OTHER EVENTS  In late June 1997. 1997. Shock accelerated the withdrawal of foreign funds. the Thai Government removed support from a major finance company. The Thai baht devaluation triggered the capital outflows from the rest of SouthEast Asia. and prompted the currency depreciation on July 2.   . Finance One.

measures which actually helped to incite panic. Contagion. the other countries in the region probably had similar difficulties. .CAUSES OF WITHDRAWL  Bank failure. the failures of finance companies helped set off the exodus. Corporate failure. Political uncertainty: hastened the credit withdrawals. and assumed that if Thailand was in trouble. In Thailand. since each country faced the potential for a change in government. the IMF recommended immediate suspensions or closures of financial institutions. the withdrawal of funds was based on concerns over the health of the corporate sector.     International Interventions. In Korea. Many creditors appeared to treat the region as a whole.

The withdrawal of funds also set off a liquidity squeeze and a sharp rise in interest rates. The lack of clear bankruptcy laws and workout mechanisms. .   The losses on foreign exchange exposure and the rise in nonperforming loans eroded the capital base of the banks.   Offshore creditors grew reluctant to roll over short-term loans.CONTINUED  The withdrawal of foreign funds triggered a chain reaction.

Thailand and Korea exhausted a substantial proportion of their foreign exchange reserves.   Malaysia and Thailand introduced mild controls on foreign exchange transactions.  .MISTAKES IN POLICIES  Rapid evolution into panic was aided by policy misjudgments and mistakes across the region. Inflammatory statements by government officials and market participants added to the panicked withdrawal of funds.

Sudden withdrawal of investor funds to the region.ELEMENT OF PANIC  Substantial elements of panic and disorderly workout. rather than  simply a deflation of asset values.  Largely unanticipated. .  Lending to debtors that were not protected by state guarantees.

EFFECTS ON COUNTRIES o    o    What happened in Indonesia : Drastic devaluation of the rupiah: from 2. Korea : Drastic devaluation of the won: from 1.700 per us$ National debt to GDP ratio more than doubled.000 to 1. What happened in S.000 to 18.000 for 1 us$ Sharp price increase widespread rioting. Major setback in automobile industry. .

and quickly bounced back. Some companies went bankrupt The Japanese yen fell to 147 Japan was the world's largest holder of currency reserves at the time. What happened in Japan : 40% of Japan’s export go to Asia. Peso fell significantly. so it was affected even if the economy was strong GDP real growth rate slowed from 5% to 1.EFFECTS ON COUNTRIES o   What happened in Philippines : Growth dropped to virtually zero in 1998. so it was easily defended. from 26/us$ to 55/us$ . o      .6% .

.  Hong Kong banks faced steeply rising interest rates on liabilities.EFFECTS ON COUNTRIES   What happened in Hong Kong :  Hong Kong dollar came under attack in November as a result of currency depreciations. What happened in Taiwan:  New Taiwan dollar also came under pressure and fell sharply. despite Taiwan's huge stock of reserves.

Dow Jones industrial average suffered as 3rd biggest point losses. Relationship with JAPAN changed forever.EFFECTS ON COUNTRIES o  What happened in US… : Markets did not collapse.   . NYSE severely hit .

Source : The Onset of East Asia Crisis .

Improving the country's standing within Asia. had been pegged to the     US dollar. Unaffected by the crisis compared to Southeast Asia and South Korea. Heavy speculation forced to devaluate its currency to protect the competitiveness of its exports.EFFECT ON CHINA  Currency. RMB's non-convertibility protected its value from currency speculators. the renminbi (RMB).ratio of 8. decision was made to maintain the peg of the currency. in 1994. .3 RMB to the dollar.


No effect on Balance of payments (BoP) Below comparison as compared to USD Countries currency India Thailand Depreciated by 15% 25-35% Malaysia South Korea Indonesia 25-35% 25-35% 70% .EFFECT ON INDIA  GDP growth was relatively unaffected by the South East   Asian crisis.

 Control on corporate exposure to external debt.  .WHY WAS INDIA NOT AFFECTED MUCH? Strong growth with services sector  Floating exchange rate  Declining External debt to GDP  Banks in India are discouraged from making investments in real estate and the stock markets.

. Immediate bank closures. Non-financial sector structural changes. 2.IMF ROLE  Provided $120 billion as bailout package. 4.  The IMF programs generally called for six key actions: 1. High interest rates on central bank discount facilities. 6. 5. Quick restoration of minimum capital adequacy standards. Fiscal contraction. Tight domestic credit. 3.

Currency depreciation and stock market collapse continued long after the programs.IMF ROLE  The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by IMF. “The IMF crisis”   .

Massive capital inflows were attracted into the region during the 1990s. Healthy Forex reserves – Thailand reached $38.WHY THE ASIAN CRISIS WAS NOT PREDICTED  The Countries maintained good budgetary positions Domestic savings and investment rates were very high throughout the region Interest rates were usually less in rest of the world (US and Japan).6 billion in 1996 equivalent to over 7 months of imports     .

LEARNINGS The lessons from developing country crises are summarized as:  Choosing the right exchange rate regime. The proper sequence of reform measure.    The importance of contagion. The central importance of Banking. .

countries will have to raise interest rates and lower exchange rates. Exchange rate regimes are extremely difficult to maintain.CONTINUED  Foreign exchange reserves are important.       Inevitably. The composition of capital inflows does matter. Information and transparency are key. Financial markets are not perfectly efficient. . IMF programs should consist of both macroeconomic and structural reforms.

   Abrupt actions by domestic and international policy makers can worsen an incipient crisis.CONCLUSION  South East Asian crisis resulted from financial panic that arose from certain emerging weaknesses in these economies It could have been largely avoided with relatively moderate adjustments and appropriate policy changes. widespread corruption. and inadequate legal foundations. There were macroeconomic imbalances. by helping to trigger the capital outflow . weak financial institutions.


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